Post Roundup: Mortgage Interest Rates

With mortgage interest rates having risen a full point over the last two months, there has been a lot of renewed talk about how interest rates will affect the housing market. We talked about this recently (Déjà Vu‎: Mortgage Interest Rates Panic), but I thought now would be a good time to post a collection of related posts I’ve written over the years on the subject.

Summary: Interest rates have a large effect on affordability, and many if not most homebuyers base their sense of how much home to buy on what monthly payment they can afford, but in the end there is only a very loose relationship between interest rates and overall home price trends.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

Normally I would agree with Tim on this point and I will concede that historically interest rates have a loose relationship with home prices.

However, this ain’t your grandma’s housing market. Uncle Sam has decided to step in and manipulate the market, and has decided to take the majority of mortgage debt onto its balance sheet. The previous bubble wasn’t allowed to completely deflate and we have an artificial floor that has been installed.

However, that floor is made of glass and will eventually break. When it does, LOOK OUT BELOW!

^Matthew what could make the glass floor break? I think we all see that the housing market is being manipulated but then wouldn’t the gov/fed reserve just keep manipulating the market? I mean the powers that be want their party re-elected in 2016 so they can’t completely F it up for the Dems. Help me see what could create an irreparable crack? Thx.

RE:Matthew @ 5 –
Yeah, my thinking is more like jillayne’s. The floor would break if they increase rates to 15 percent, but I don’t see that happening. They will slowly ween us off the Fed’s teet, right? Maybe I am missing something here? Enlighten us.

I’m not sure if it will be a single event or a series of events. You are starting to see a liquidity crisis hit China now. You saw a Eurozone crisis a few months ago. The central banks step in and slap a bandaid on a gunshot wound but eventually the patient needs serious medical attention other than just another hit of the morphine drip.

I think this rise in rates is for real this time and is happening much faster than anticipated. I think we see a top and another leg down in housing.

Well, your typical “Chinese” cash buyer will disappear soon given the situation in China. I also wonder where the cash buyers were in 2009 – 2011? This is not a free market anymore so I am not going to predict what will happen next.

RE:Matthew @ 5 –
Yeah, my thinking is more like jillayne’s. The floor would break if they increase rates to 15 percent, but I don’t see that happening. They will slowly ween us off the Fed’s teet, right? Maybe I am missing something here? Enlighten us.

You’ll notice that the stock market was propped up today with a 1.7% rise in home prices according to the Case Shiller Index.

WTF?

That in turn gave a rise to durable goods orders, you know, the way new home sales generate demand for new washers, and dryers, refrigerators, stoves, water heaters…..

China is playing along with the Central Bank murmuring it will do what it can to help.

The Board of Governors are doing a fine job of spinning the data into the good news of JC.

I’m going to trot out one of my favorite sayings about Real Estate, that good news is bad news. I’m looking at this last rise in home prices as very bad news for the economy.

A rise in home prices was to be expected. What we aren’t getting fully is the earnings reports of companies that should be the bigger drivers of economic data, but are being brushed aside by this housing report.

Uh oh, I just checked and new homes sales are at a five year high, and that all important consumer confidence report is also at a five year high. I think you’d need to be high to take any of these new data points as a serious indication of our economy.

Interest rates are still climbing, but slowly. I think they will recede to close out some sales.

I think there is a “very loose relationship between interest rates and overall home price trends” because the people that can afford the least get pushed out of the market and everyone else has to downgrade their purchase price. People buy what they can afford. When interest rates go up, instead of house prices going down, everyone buys less house. It shifts buyers down the house purchase price ladder as opposed to pushing down house prices.

RE:Erik @ 12 And this used to be the reason why low end homes held their value better through downturns. Where we’re at now, the high end homes have recovered to a far greater degree while the lower tier is still full of distress sales.

There are a couple of possible outcomes – low tier homes gain in desirability, or the mid/upper tier buyers unaffected by 1-2% rate fluctuations carry on while the low end rate sensitive buyers pull back.

RE:mike @ 13 –
We will get to see the median home prices by tier tomorrow. From previous posts, I thought low tier median price went down the most and then up the most. High tier homes didn’t drop as much. I attributed the high tier homes not dropping as much because people with nice houses generally have better jobs than people with low tier homes. Many people with low tier homes aren’t as valuable to their company and were laid off in the downturn. So low tier homes dropped in price more since the supply of low tier homes was greater than high tier homes.

RE:mike @ 13 –
We will get to see the median home prices by tier tomorrow. From previous posts, I thought low tier median price went down the most and then up the most. High tier homes didn’t drop as much. I attributed the high tier homes not dropping as much because people with nice houses generally have better jobs than people with low tier homes. Many people with low tier homes aren’t as valuable to their company and were laid off in the downturn. So low tier homes dropped in price more since the supply of low tier homes was greater than high tier homes.

That certainly was the case in our most recent bubble. Towards the end of the last bubble, the low tier median prices were just growing like crazy. And then they certainly took the biggest brunt in the decline. But I think there’s more to it than simply the low tier area homeowners whose jobs aren’t as good. There was manipulation of people who should not have been able to qualify for loans at all. The low tier areas had all kinds of home sales to people who bought with zero down, or with stated income loans. Some neighborhoods in the Seattle area are still seeing a lot of short sale and bank owned listings. They clearly haven’t all been cleaned out. Maybe Bellevue or Sammamish or Kirkland or Ravenna, Queen Anne, Wallingford, etc are not affected by short sales and foreclosures, but Kent, Tukwila, SeaTac, Skyway, South Park, etc surely are.
Homeownership is a worthy goal. But this free for all of just giving every Tom, Dick, and Harry a home loan was more about profit and greed than helping society.

RE:Ira Sacharoff @ 15 –
Yeah, I have represented Tom, Dick and Harry both times I purchased homes. The first time my logic was that I have nothing to lose and I got a zero down loan. The second time I had the same logic and paid 5% down. I think I did good this second time around, but we’ll see. I thought I did good the first time until the market collapsed on me.

If us low tier people are able to get loans for cheap, we will continue getting them. Seems kinda like a no-brainer to me. What are they going to take from me, my beater pickup? They would be doing me a favor if they took it. Being low tier isn’t what I prefer, but it is low stress because we don’t have a whole lot to lose. We take more chances.

The FED isn’t buying down rates for the consumer to purchase homes or to increase prices so fewer consumers are under water, the FED purchase securities to help banks clear the debt of inventory they where holding. When the Banks are not taking the risk holding onto non-interest baring property in massive quantities the FED will stop purchasing the securities from them. The FED (Bernanke) is driven by Banks and Wall-Street profit and not how much a home cost to the average person in America. Once the inventory is off their sheets they don’t care if interest rates go up because payment is one part price and one part interest rates and they make the same money regardless of which one goes up. So the FED will stop the Bank Welfare interest rates and soon as the interest rate increases are just as profitable the Banks as clearing their non-interest bearing properties.

The FED isn’t buying down rates for the consumer to purchase homes or to increase prices so fewer consumers are under water, the FED purchase securities to help banks clear the debt of inventory they where holding. When the Banks are not taking the risk holding onto non-interest baring property in massive quantities the FED will stop purchasing the securities from them. The FED (Bernanke) is driven by Banks and Wall-Street profit and not how much a home cost to the average person in America. Once the inventory is off their sheets they don’t care if interest rates go up because payment is one part price and one part interest rates and they make the same money regardless of which one goes up. So the FED will stop the Bank Welfare interest rates and soon as the interest rate increases are just as profitable the Banks as clearing their non-interest bearing properties.

Mid income class is the fundation of our economy.
FED buying down rates is to help and hold on the mid class to strengthen the economy fundation.
In past few years, if FED didn’t lower the interest rate to give mid class a chance to breath,
you have no idea how many familys would have been destored.

“Mid income class is the fundation of our economy.
FED buying down rates is to help and hold on the mid class to strengthen the economy fundation.
In past few years, if FED didn’t lower the interest rate to give mid class a chance to breath,
you have no idea how many familys would have been destored.”

Well, at least they are getting the funds from their fundation. While breath is destored they won’t need that storage unit any more. Great comment, thanks!